With recent market events and concerns about the valuation of complex financial products drawing increased attention to the industry's risk management practices, Federal Reserve Board governor Randall Kroszner says it is increasingly important that senior management understand the risks assumed by a firm's individual business lines and effectively communicate an enterprisewide strategy. Speaking at the Global Association of Risk Management Professionals' annual convention in New York on Feb. 25, Kroszner noted a "tendency for business-line heads or individual employees to focus on their short-term compensation and not think about the long-term risks that their activities create for the firm." It is management's responsibility, he added, to provide incentives and controls that counter the potential for individuals to discount risks to the broader institution. This article is based on his prepared remarks.
Recent events remind us that markets can be quite complex and difficult to predict and that sound risk management is fundamental to the health and resiliency of both individual financial institutions and financial markets generally. Information and incentives ... lie at the very heart of good risk management. Information is vital to good decisionmaking, and incentives send the right signals and create beneficial outcomes both within individual institutions and to the financial system as a whole.
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